War spooks stocks

© St. Petersburg Times
published March 25, 2003

Gloom settled over the stock market Monday as investors began to realize that victory in Iraq may not be swift or easy.

The Dow Jones Industrial Average gave up 307.29 of the more than 600 points it gained during last week's war rally, closing at 8,214.68. The Standard & Poor's 500 Index and the Nasdaq Composite Index turned in similar losses of about 3.5 percent. European markets were down 3 to 6 percent.

"The big positive move last week was based on the thought that we were going to go in, and they were just going to quit and that Saddam had been seriously injured or killed," said St. Petersburg money manager Timothy McIntosh of Strategic Investment Partners. Instead, Amerian troops met resistance and casualty reports began to come in over the weekend.

"This is going to be a very hard market in the coming days," predicted Russ Koesterich, U.S. equity strategiest for State Street Corp. in Boston. "Anything that indicates this war is going to drag on is going to pressure the market."

Defense stocks were among the few winners Monday as investors bet that a longer war will create more demand for military equipment and ammunition. Initially war is fought out of inventory, but the longer it continues, the more likely troops will have to restock. Lockheed Martin stock was up $1 Monday to $46.41 and Northrup Grumman gained $2.08 to close at $84.43.

Overall, declining stocks outnumbered the winners 11 to 3 on the New York Stock Exchange. Airline stocks were hit hard based on fears that the war will curtail travel plans.

While the stock market's ups and downs are never predictable, a pullback was not a big surprise simply because the market had risen 8 percent last week. After strong gains, it is not unusual for some investors to sell stocks to lock in their profits.

Just how long investors will focus on the war's ups and downs is a subject of some debate among market watchers. In other words, when will investors stop watching CNN and switch back to CNBC?

McIntosh is among those who think that as long as the war lasts, it will be foremost in investors' minds.

"The volatility is here to stay until this is officially resolved," he said.

Others say investors' attention will soon return to the weak economy, which was sinking the stock market before war became an issue.

"We're going to get over being magnetized to the tube watching the war," said finance professor David Scott at the University of Central Florida. "It won't be more than a couple of weeks before folks start to tune that out."

He said that within a month, big investors in particular will be focused on the economy.

"There's only one thing that really drives stock prices and that's the ability of companies to generate after-tax cash flow," he said.

Finance professor Steven Bolten at the University of South Florida said the problem with trying to make predictions is that we are in uncharted territory.

"We're in a different world than we were before," he said. "Any major terrorist attack that leaves the psyche of the American consumer or American business in a state of trepidation, might more significantly influence the economy than the war."

Bolten said the economy offers plenty for investors to be concerned about no matter how quickly the war is resolved and whether or not the threat of terrorism can be alleviated.

What was bad for stocks was good for bonds Monday. The price of the benchmark 10-year Treasury note rose slightly as its yield fell from 4.07 percent Friday to 3.97 percent Monday.

-- Information from Times wires was used in this report. Helen Huntley can be reached at huntley@sptimes.com or (7270 893-8230.

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